Unit 2 - 2 Flashcards
How is APC calculated?
Comsumption/income
If APC = 1 = 100% income spent
What is MPC?
Marginal propensity to consume
The proportion in any rise in income that consumers would spend on consumption
How is MPC calculated?
Increase in consumption/increase in income
What is meant by the multiplier?
Injections into the circular flow of income are multiplied through the economy as people receive a share of the income and then spend most of what they receive
What is a closed economy?
NO IMPORTS OR EXPORTS
What is an open economy?
IMPORTS AND EXPORTS
How is the multiplier calculated?
1/MPS OR 1/(1-MPC)
Why is the multiplier important?
- A rise in any injection into the circular flow will increase the NI by more than what was injected
- A fall in any injection will decrease the NI by more than just the decrease in the injection
- An increase in a withdrawal will have a negative multiplier effect
TRADE CYCLE DIAGRAM
BOOM
RECOVERY
SLUMP
RECESSION
What are the characteristics of a slump?
- Firms going out of business
2. High level of unemployment
What are the characteristics of a recession?
- 2 successive quarters of negative growth
- Incomes and outputs decrease
- Businesses face decreasing demand
- Firms may have to lay off workers
What are the characteristics of a recovery?
- Firms invest more
- Incomes and output is rising
- Consumers increase their spending
- Unemployment is decreasing
What are the characteristics of a boom?
- Consumer spending and investments are high
- Increased levels of demand as disposable incomes rise
- Profits are high for most firms
- Low unemployment leads to higher wages and rising inflation
What are examples of fiscal policies?
TAX AND GOVERNMENT SPENDING
What are examples of monetary policies?
INTEREST RATES
